Tech companies need their own tax regime – but not one of their choosing

In economics, dematerialisation is the idea that we need less and less physical stuff to produce the goods...

In economics, dematerialisation is the idea that we need less and less physical stuff to produce the goods and services that we consume. For obvious reasons, our rising consumption of digital services is fuelling the trend – and in the process also dematerialising the tax base.

Due to their immaterial nature, digital services are geographically indeterminate. This makes it easier for tech companies to minimise their tax liabilities in any particular nation. Of course, avoiding tax is not the same thing as evading it – as Google recently demonstrated in a courtroom victory over the French government. But what of the charge that the big tech companies are ‘dodging’ tax (implying a moral lapse if not a legal one)? A particular complaint is that companies that sell vast amounts of online advertising, like Facebook and Google, pay very little corporation tax in the countries where the advertising is sold.

“…the basic underlying principle of the international taxation system – tax should be paid where value is created. Intellectual property is an ever rising portion of value being created and when we come to things like software platforms it’s by far the majority.”

“I know that it will be claimed to be due to the intellectual property having been developed in the USA. But let’s be candid; IP is worthless without a customer and it is UK customers who create the value added in this country, and not the IP as such”

Worstall is not impressed with Murphy’s logic:

“It’s worth just savouring that. JK Rowling created considerable intellectual property with her books, but it’s the readers who provide it, so therefore JK must be paying tax everywhere else and not in the UK – or perhaps only in the UK on her UK sales.”

The JK Rowling analogy is a revealing one, but not quite as Worstall might wish. He is right when he says that customers don’t create value (rather, they pay for it). But while that applies to Ms Rowling’s readers, it doesn’t apply to the users of Facebook – who don’t pay anything. Instead, the customer is the advertiser who pays Facebook for drawing its users’ attention to adverts. As the new old saying goes: ‘if something is free, then you are the product’.

Unlike the Harry Potter reader, the Facebook user is the (unpaid) co-producer of what Facebook sells. Obviously, as a digital platform, Facebook is essential to the whole enterprise – and it’s fair that the foreign-owned intellectual property on that platform should be taken into account. But let’s draw a parallel with another kind of platform – a North Sea oil rig.

Without the engineering brilliance of companies like Shell or BP there would be no North Sea oil industry. However, no one can deny that much of the value of what they produce comes from the natural resources that they extract – resources that properly belong to the nation not the oil companies. That’s why the North Sea oil industry has its own special tax regime, one that allows private enterprise to make a profit, but ensuring that the nation gets its due.

We should treat the big tech companies in a similar way. If the value co-produced by a nation’s collective attention (and sold on to advertisers) can’t be individually remunerated, then it should be nationalised – and taxed accordingly. Yes, the platform should have a fair share of the profits, but so should the nation.